• Sunday, July 14, 2024
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Africa’s trade volume to shrink, higher inflation rate seen on Red Sea attacks

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Africa’s trade volume is projected to shrink in the first half of 2024 as Iran-backed militants continue to disrupt trade flows on the Red Sea route – the world’s main trade route to most container ships, a new report says.

The report compiled by Afrexim Bank on the implication of the Red Sea attacks on African trade and macroeconomic stability also said that African countries face the risk of accelerating inflation following the attacks on ships using the vital trade route.

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“The ongoing attacks in the Red Sea have produced distortions to African trade and may have deeper implications for the region’s macroeconomic stability in the short to medium term,” the report said.

“On African trade, the crisis has given rise to a reallocation of resources among countries on the continent, depending on what side of the pendulum they sit,” it added.

According to the report, the disruption in the worldwide supply chain, coupled with rising prices for food and energy, might compel local manufacturers to divest from the region if production costs exceed those of their rivals in other continents.

The report stated that the Red Sea is a major trade route accounting for about 15 percent of global shipping traffic linking Europe, the Middle East and parts of Africa.

It noted that the attacks in the Red Sea have prompted a reallocation of resources, producing gainers and losers as trade shifts from the Suez Canal to routes along the Cape of Good Hope.

It stated that early data from the first few months of 2024 shows that trade volumes through the Suez Canal have plunged by 50 percent while trade volumes in the Cape of Good Hope skyrocketed by 74 percent year-on-year.

“For exporters in the region relying on the trade route, inventories may begin to accumulate because of delays in the transportation of exports to Europe with negative implications for their revenue streams,” the report said.

The report stated that Ethiopia is especially vulnerable because it relies on the Port of Djibouti along the Red Sea for a significant fraction of its trade.

The report said major ocean carriers, such as Maersk, Hapag-Lloyd, and MSC, have largely halted their Red Sea transits and have cautioned clients to brace for extended disruptions in the region, noting that they foresee a crisis that could persist well into the latter half of 2024.

It added that the development may repress the growth of African trade by forcing stakeholders to rethink their strategies considering the exposed vulnerabilities of trade to geopolitical tensions in the region.

“This may trigger divestments from the region if costs rise above the competitive levels obtainable in other regions. Already, we expect the region’s trade volume to contract by half-year.”

Read also: 1,382 shipping containers lost at sea annually — Report

It stated that the higher freight cost would not only spill into the prices of consumer goods across the continent but also exacerbate the already elevated inflation levels across the continent.

The report warned that such heightened inflationary levels could lead to further interest rate hikes by Central Banks across the continent that could stifle economic growth for the year.

“The higher freight costs resulting from rerouting of Africa-bound vessels through the longer Cape of Good Hope may lead to higher inflation due to elevated import prices.”

“Also, since the composition of most items exported from the continent is largely primary products as against processed items, the additional costs incurred by exporters may gradually filter into consumer prices through a second-round effect of processed items resold in local markets.”